Covid-19 Update 3.20.20

We have talked with many of you individually over the last few weeks about your portfolios and our advice.  If we write anything here that contradicts anything we said, please know that this is a very fluid situation.  Although markets are forward looking, it is early in a recession.  We have been busy assessing newly released balance sheet (fiscal year end 2019 10-Ks) for many of the companies we own for you.  We feel pretty good about the companies we own for you, but a few have taken on debt recently to make large acquisitions.  We are carefully assessing and monitoring these.  We have made a couple minor portfolio sells recently and there may be more.  Markets have become less liquid so we want to be careful about sales.  Also, many good companies that we own for some but not others because prices have been too high for years are looking more attractive.  We are also actively assessing other quality companies that have now gone on sale and would be new investments for you.  But, it’s early, and we plan to invest over the course of many months.  Again, this could change.  A viable treatment protocol could set a floor in the stock market.

We wrote in our Q4 2018 letter to you, “If we were to add any theme for 2019 it would be: debt. It is late in the economic cycle. Corporate, consumer, and government debt are up substantially after years of low borrowing costs. We are not predicting any downturn here, but we want to make sure what we own now and what we consider for new investments have conservative net debt levels.”  Now, more than ever, we are seeking quality companies trading for less than intrinsic value and which have solid balance sheets. On the bond side, we are closely monitoring developments in corporate bonds, which we’ve reminded our clients from time to time may decline in value in times of market stress. We can’t rule out the possibility of divesting of certain small positions in our corporate holdings, but feel that the overall high credit quality of our bonds will perform as expected during the volatility and liquidity crunch. We also remind clients that the majority of client portfolios have solid exposure to government bonds and US Treasuries, the safest places to park money anywhere in the world during financial crises.

Finally, there will be a recovery!  While not always as a Registered Investment Advisor, we have been investing for over 30 years, since before the 1987 stock market crash.  We’ve seen some downturns.  Volatility is the price paid for long-term gains. The talking heads on CNN, CNBC, Fox Business, you name it, will repeat the bad news ad nauseam. It often looks bleak.  Then, America (and the rest of the world) finds a way to get back to work.  Most corporations recover.  New businesses are formed.  Corporate earnings recover and so do stock prices.  Below we have provided a chart of the history of the earnings (in log scale) for the Standard & Poor’s 500 Index of the largest publicly traded corporations in America since WWII.  Every recession trigger is different.  And yet, we always regroup and recover.

For your reference, we have posted all of our Covid-19 Correspondence on our website. We are here for you.